Three into one doesn’t always go

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Everyone agrees that pension fund mergers are a good idea. But doing something about it is another matter, finds Carlo Svaluto Moreolo

Although there have been discussions about mergers between Italian pension schemes and the pension regulator, Covip, has sent strong signals that consolidation between schemes is not only to be welcomed but encouraged, there has been little action. Addressing a Senate committee at the end of April, Covip’s new chairman Antonio Finocchiaro said that consolidation between smaller schemes was needed for a more efficient system that benefits from economies of scale and added: “A significant amount of supply of second-pillar pensions is wasted in Italy. The average size of Italian pension schemes is much smaller than that of other countries. Schemes of more adequate size would allow more articulated controls and more valid investment and management strategies.” However, he concluded, “Covip cannot impose but only favour consolidation of supply”.

An anticipated merger between the three industry-wide schemes in the air transport sector - the pilots’ scheme Previvolo, the cabin personnel scheme Fondav and the ground personnel scheme Prevaer - has been delayed because Previvolo wants to preserve its independence. According to Prevaer chairman Giancarlo Gugliotta, Previvolo’s members feel that their status is too different from that of cabin and ground personnel.

Gugliotta says that developments are simply not moving quickly. “We all agree on the principles, but the there is resistance from the independent unions representing the pilots. When the three schemes merge, the executive board will become one, and one of the questions is, ‘where do we put all the existing directors?’”

The benefit of a merger between the three schemes is clear. Costs could be levelled out and reduced significantly. Previvolo’s members pay costs of up to €170 a year while Prevaer’s members pay €28. This compares with costs for larger schemes like mechanical workers’ fund Cometa, which are around €13 a year.

The collapse of Italy’s flagship carrier Alitalia in the summer of 2008, which left many pilots and other personnel out of work, made the merger more sensible. A single scheme for the air transport sector would have around 50,000 members and €400-500m of assets. But the attitude of trade unions on the matter is ambiguous, since some union representatives are actively resisting the merger, while others are saying that mergers between schemes are beneficial and should occur.

Tommaso Merlino, who is responsible for the transport sector at the UGL trade union confederation, which is linked to the governing People of Freedom (PdL) party, and, represents UGL on the Prevaer board, says that there is growing awareness and consensus that mergers between the sector’s schemes would have a positive impact. Indeed, schemes like Priamo, for public transport employees, and Eurofer, for railway workers, have signalled that they would welcome consolidation in the sector.

Merlino suggests that in the air transport sector the pilots’ union’s resistance is making the planned tripartite air workers’ scheme merger more difficult. “The pilots are not keen on the merger because they have a history of autonomy and emancipation,” he says. “Their position is somewhat anachronistic though, and within their sector too there is rising awareness of the importance of a merger.”

Domenico Proietti, secretary for pensions at the UIL trade union confederation and vice-chariman of Assofondipensione - a multilateral association formed by all of the actors in the pension industry: the schemes, employers’ associations and trade unions - says the union grouping is actively promoting mergers between schemes. “When second pillar pension provision began in Italy, trade unions agreed that there should be as many schemes as there were different types of contracts, so that workers could feel close to the scheme that supported them,” he says. “But not long after we realised that since many small schemes had emerged, consolidation could achieve economies of scale and improve the performance. This process obviously requires time and political consensus of the different parties, both the unions and the employers.”

Proietti adds: “We are trying to spread awareness that larger funds would achieve better performance. In principle the different parties do not oppose the idea of merging schemes but within certain entities there is resistance of a psychological nature. We will not limit ourselves to explaining that a scheme with fewer than 5,000 members has no reason for existence on its own, we will also try to exert political pressure. However, mergers have to be made with the consensus of all the parties, and pursuing the legislative way is not the preferred strategy for the different actors.”

He points to the handicraft production sector as one that would benefit from mergers. The schemes in the sector have few members, compared with their potential, so mergers with other schemes would be a natural way of increasing membership. Tourism and commerce are other sectors Proietti thinks would benefit.

Proietti’s counterpart at the CGIL, Maria Rita Gilardi, also declares herself to be in favour of mergers: “We think that merging closed schemes can only benefit workers. As well as cost reductions, workers’ contractual power would increase with larger schemes, as would organisational efficiency. Obviously, this means creating schemes of the right size that can achieve efficiency rather than just creating one scheme for each sector. Efficiency means achieving the right balance between the number of members and operative costs.”

Gilardi blames the slow progress achieved on employers’ associations. “The CGIL has stated the importance and necessity of mergers,” she says. “In fact it is disappointing to see that small schemes are emerging. We think that the resistance to mergers comes from the employers’ associations. The CGIL is a single entity when it comes to contractual negotiations, while the employers’ associations are many and often they do not recognise each other. This makes merging schemes more difficult. For example, two separate industry-wide schemes for the tourism and commerce sectors have been created through agreements with different employer associations. Fon.te was founded through an agreement between the unions and Confcommercio whereas Marco Polo was created with Confesercenti.”

But the pros and cons of consolidation are not so straightforward, says Alessandro Zanon, a former chairman of Generali’s corporate pension scheme, PreviGen. “In the banking and insurance sectors there may be benefits from a consolidation of funds,” he notes. “However, there is naturally a feeling of independence between funds because most of them are corporate pension schemes. Some have a long history of 40 or even 50 years of operations. It is not easy to imagine schemes of this type merging.”

He adds: “Consolidation in the sector has already prompted smaller schemes to join larger corporate ones. However, at present it is difficult to imagine a single scheme for employees of different market competitors. There isn’t a word about complementary pensions in collective contracts in the financial sector. However, more than 90% of employees in the sector are members of private pension schemes. It’s partly due to the fact that financial companies can source administration and fund management internally, while closed pension schemes have to source all these capacities externally.”

Zanon believes that consolidation is welcome and can bring benefits but that it should not be the main focus in the industry. “Most of the roughly 150 schemes with more than 5,000 members will be allowed to continue operating,” he says. “Merging pension schemes to bring down costs is not necessarily the way to encourage more people to join private pension schemes in Italy. Costs are already low. If costs halve tomorrow, membership would not automatically shoot up. The problem is we need to spread awareness, reminding people that their state pension will be worth very little.”